Agenda item

12.1     The Tri-Borough Director of Treasury and Pensions introduced his report which outlined to the Committee that the current strategic asset allocation of the Fund is as follows: 60% in equities, 19% in fixed income, 6% in renewable energy infrastructure, 5% in infrastructure, 5% in property, and 5% in affordable housing.

12.2     The Committee were informed that the Fund's funding position has significantly improved since the 2019 actuarial valuation, increasing from 99% to 149% as of March 31, 2023. With the stronger funding position, there is an opportunity to reduce investment risk in the portfolio, considering the broader dynamics of the investment market.

12.3     The Committee were updated on the equities allocation, which is currently the biggest contributor to funding risk. Additionally, the 2.5% target allocation to affordable housing has not been allocated yet. The Fund is cashflow neutral and there is no immediate concern for having to generate additional income. However, the Committee were informed that the infrastructure mandates are expected to generate supplementary income in the future.

12.4     During the investment strategy review, Isio recommended transferring 5% of the Fund's global equities into the Insight Buy and Maintain Bond fund. This shift was expected to decrease the Fund's volatility from 12.0% to 11.0% per annum and enhance risk-adjusted returns by 0.3% annually. The primary motivation behind this proposal was to ensure that member benefits can be met on time and fulfil the fiduciary duty of the Pension Fund Committee.

12.5     The Committee were informed that as funding levels generally increase, pension schemes will usually reduce investment and funding risks by transitioning into less volatile asset classes. Introducing higher risk at this stage could jeopardize the funding gains and surpluses achieved since the 2019 valuation, potentially leading to reductions caused by negative market movements.

12.6     The Committee were informed that Isio's had maintained their view that the most appropriate strategy going forward would be to reduce risk by increasing the Pensions Fund's fixed income allocation by 5%, funded by a reduction in equity mandates. Additionally, Isio suggested considering renewable infrastructure as a replacement for parts of the fixed income allocation if it meets the lower-risk criteria.  The Tri-Borough Director of Treasury and Pensions informed Members that Officers were supportive of this approach.

12.7     The Tri-Borough Director of Treasury and Pensions informed the Committee that the source of the 5% reduction in equity allocated needed to be considered, with 1/3 managed passively by LGIM and the remaining 2/3 held in active portfolios. Isio put the following recommendations to the Committee:

Rebalance: to rebalance the overweight and underweight allocations within the equity and fixed income mandates. With any excess cash held for the purpose of illiquid fund draw down requests.

De-risk: to transition 5% from the active global equity mandates into the Quinbrook Renewable Energy Infrastructure. The Committee was recommended to take 2.5% from each of the two active global equity funds.

Affordable housing: to allocate 2.5% to the LCIV affordable housing sub-fund.

12.8     RESOLVED

            That the Committee discussed the recommendations, as set out within Isio’s investment strategy review follow up, and agree an appropriate strategic asset allocation as set out above for the Fund going forward.

            That the Committee approved that Appendices 1 and 2 to this report are not for publication on the basis that they contain information relating to the financial or business affairs of any particular person (including the authority holding that information) as set out in paragraph 3 of Schedule 12A of the Local Government Act 1972 (as amended)